Courts have to consider public policy concerns

The Supreme Court of Uganda ruled recently in the keenly awaited appeal by Ham Enterprises against Diamond Trust Bank Uganda and Diamond Trust Bank Kenya

The court held that a lending transaction between a foreign bank and an Ugandan borrower does not constitute “transacting financial institutions business” as defined by the Financial Institutions Act 2004 (FIA)

This finally clarifies that a foreign lender does not require a licence from the Bank of Uganda (BoU) under the FIA to extend credit to Ugandan borrowers

Regardless of the finding of the court on the alleged illegality, this does not absolve a borrower from repaying its debts

In 2020, the high court shook the Ugandan market when it held that it was illegal for a foreign bank to lend money to a Ugandan borrower without a licence from BoU under FIA

The high court further held the loan agreement between the foreign bank and the Ugandan borrower unenforceable Ham

Enterprises borrowed money from Diamond Trust Bank Uganda (DTBU) and Diamond Trust Bank Kenya (DTBK)

A dispute arose when the borrower defaulted on its loan repayments and the borrower instituted a suit in the high court against DTBU and DTBK At trial, the borrower argued the loan agreements with DTBK were illegal and unenforceable due to DTBK carrying out financial institutions business in Uganda without a licence from BoU

The high court agreed

The decision of the high court threw the market into disarray, given the large number of foreign lenders to Ugandan businesses

The high court allowed the borrower to escape liability on the loan and walk away without repaying the borrowed funds, inflicting financial loss to DTBK’ s investors

The decision was appealed to the Court of Appeal and then to the supreme court

The Supreme Court determined whether DTBK, as a foreign bank, engaged in transacting financial institutions business within Uganda and thereby required a licence under the FIA

The FIA prohibits a person from transacting any deposit-taking or other financial institutions business in Uganda without a valid licence The court stated that the key criterion to determine if a person is transacting financial institutions business in Uganda is whether that person holds money on deposit from Uganda, from which it extends loans to borrowers

In this case, the court found that the funds disbursed to the borrower had been transmitted by DTBK and were not deposits from Uganda DTBK did not receive or hold any deposits in Uganda and indeed did not lend the borrower out of any such deposits

As a result, the court found that the FIA did not apply to DTBK as a foreign bank Furthermore, it held that the syndicated loan transaction between DTBK was lawful and referred the case back to the high court for retrial before another judge to determine the outstanding obligations owed by each party

This case settles an important point of law on the legality of transactions between foreign lenders and Ugandan borrowers Foreign lenders can carry on their business in Uganda with confidence, knowing that their lending transactions are enforceable under Ugandan law

Even if the court had found it illegal for a foreign lender to advance a loan to a Ugandan borrower without a licence from the BoU, the borrower would still have been obligated to repay the loan Under the Contracts Act 2010, a person who receives advantage under a void agreement is still bound to restore it or pay compensation to the person from whom they received the advantage In other words, the borrower would still have to repay the debt to DTBK

A similar conclusion was arrived at by the Supreme Court of Zambia in almost identical circumstances In the case of Zambia Extracts Oils and Colourants Ltd v Zambia State Insurance Pension Trust Fund (SCZ Judgment No 31 of 2016), a borrower from an entity not licensed under the Zambian Banking and Financial Services Act challenged a borrowing as illegal and sought to evade repayment

The court found that, where a statute (as does the FIA) imposes a penalty for contravention of its provisions, it cannot be the intention of the legislature to also void the contracts entered into in contravention of the law or at punishing the transgressors twice, that is, by imposing criminal sanctions and by voiding

This Case Settles

their contracts as this would amount to double jeopardy

The court further stated that to allow the borrower to walk away with such a substantial sum without repaying it would be unconscionable and contrary to public policy and public interest

The courts must consider public policy concerns before invalidating such contracts For example, a finding that a contract made with an unlicensed banker is invalid would mean that persons who had deposited money with such unlicensed banker would be unable to recover money that such unlicensed banker had lent as it would be disabled from performing its own obligations, including those owed to its depositors

A

Point Of Law On The Legality Of Transactions

BETWEEN FOREIGN LENDERS AND UGANDAN BORROWERS

Given the great demand for affordable credit in the Ugandan market, this confirmation by the highest court, that doors are open to foreign lenders without a requirement for licensing, is good news for the market

● Rehema Nakirya Ssemyalo and Phillip Karugaba are from ENSafrica Uganda